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Introduction to Cost Accounting

Cost Management System

Cost Management

• Structured interrelated process which primary objective is to provide useful information to its users.
• Involves collection, recording, storage, management, processing, retrieval, and reporting of relevant financial and non-financial information.

Input Process^ Output

Economic Events Process^ Report

• Part of accounting information system.
• Set of processes and procedures in order to communicate information on company products, cost-related activities, and product profitability.
• Often used to assist management in cost management A managerial process or activity that involves planning, estimating, budgeting, financing, funding, managing, controlling, and benchmarking costs associated with various parts of an entity.

Cost Accounting

• Field of accounting applied in cost management
• Reporting system that provides cost information on a company's products and other relevant cost information to managers to perform their functions.
• Scope and use:
  • Costing products and related expenditures
  • To generate reports to assist in planning, control, and decision making on a company's resource spending.

Control

• Is a management function on continuous measurement, feedback process on operations and addressing deviations in order to make sure that goals of the company are being met.
• Cost accounting provides cost information to evaluate the actual performance of the company over the plans and pre-determined standard Decision Making
• Integral management function and is being done all throughout the management phase.
• Cost accounting serves as basis for decision making through providing detailed cost reports. Financial Accounting vs Managerial Accounting Particular Financial Accounting^ Managerial Accounting Primary Users Concentration of Reports Time Orientation GAAP, PFRS & PAS Type or Reports Focus of Information Time Span of Report Legal Requirement External Users Company as a whole Historical Compliant General Financial Statements Precision Annual or Quarterly Yes Internal Users Segments of the Company Future Non-Compliant Special Internal Reports Timing As Needed No Cost accounting bridges financial and managerial accounting through providing useful information to the two fields of accounting.

Two Major Types of Cost Accounting System Financial Accounting Cost Accounting Management Accounting (General Financial Statements) (Cost Information) (Special Internal Reports) Job Order Costing System

• Use to account for special orders or custom-made products.
• Each job measures and accumulates cost
• Unit cost are computed using total cost on job cost sheets Process Costing System
• Use to account for homogenous or mass production.
• Each department accumulates cost
• Unit cost is computed using departmental cost and equivalent unit of production. Combines both job-order and process costing system. Used by companies engaged in both mass production and custom made. Hybrid System

Factory Overhead Direct Labor b. Period costs or Non-manufacturing costs Selling Expense Direct

• The labor costs of employees directly involved in the production process, such as converting materials to finished goods and that is traceable and can be identified in connection to the finished product. Indirect Labor
• labor costs that will be incurred which are also necessary for the production process but they are not traceable to a specific product Factory-related costs that are incurred in producing a product or costs of making the products or providing the service but which are not classified as direct materials or direct labor. These costs are traceable to a specific product. Non-inventoriable costs related to accounting periods rather than units of products as compared to product costs Administrative Expenses
• Costs incurred to market and distribute the product to customers. These are also referred to as order-getting and order-filling
• Examples: advertising, salaries, and commissions of sales personnel, delivery, shipping, and storage of finished goods
• costs that are related to ensuring that the activities of the company are properly integrated with maximizing the overall profit of the company
• Examples: top-executive salaries, printing, general accounting, office expenses, and office rent. Addtl Info: Prime Costs = DM +DL Conversion Cost = DL + FOH Total Manuf Cost = DL+ FOH+ DM

II. AS TO BEHAVIOR a. Variable Costs Understanding the behavior of costs with their related activities is necessary for managers to manage cost-effectively. Tabulation of Variable Cost b. Fixed Costs

• Costs that vary proportionally or directly in total with the related activity.
• It should be noted that variable cost per unit remains constant as volume changes while total variable cost increases proportionately with activity. 200 150 100 50 (^0 10 20 30 ) units Total Variable Costs Activity 10 20 30 40 Variable Cost per Unit 5 5 5 5 Total Variable Cost per Unit 50 100 150 200
• Costs stay the same in total and it is not affected by the related activity within the relevant range. Relevant range is the activity level where cost relationships are considered valid.
• In contrast with the total fixed cost that remains constant, the fixed cost per unit behaves inversely from the activity Activity x Variable Cost per Unit = Total Variable Cost per Unit

a. Account Analysis b. Scatter Graph c. High-Low Method Total Cost (Highest) - Total Cost (Lowest) Total Activity (Highest) - Total Activity (Lowest)

• Classification of cost by using judgment, experienced employees will classify the accounts whether they are variable or fixed using historical data, company policies, and experience.
• This method uses only two data points within a data set, being the highest and lowest point. Both points will be based on the activity level in the given data set.
• The formula to compute the unit variable cost is expressed as follows:
• This method involves the use of a visual fit line. It separates the elements of fixed and variable by plotting the set of mixed costs along with the y-axis and activity level along the x-axis of a graph. b = The total fixed cost may be solved using either the highest or lowest point, together with the general cost formula. ILLUST RAT ION Month June July August September October Cost 8, 6, 8, 8, 6, DLHRs 18 12 19 17 14

Highest Month (August) Lowest Month (July) Difference DLHrs 19 12 7 Cost 8, 6, 2, Total Cost Less: Variable Portion (P400 x 19) (P400 x 12) Monthly Foxed Cost High 8, 7, 1200 Low 6, 4, 1, d. Method of Least Square ΣY = Na + bΣx ΣXY = Xa + bΣX^

• This method uses all the given set of points in the data and uses mathematical equations to arrive at a cost function that will represent the data set.
• The two formulas used in this method: Y = Total Cost a = Total Fixed Cost b = Variable Cost per Unit x = measure of activity level n = number of observation Month June July August September October Total y 8, 6, 8, 8, 6, 37, x 18 12 19 17 14 80 xy 150, 72, 167, 136, 93, 619, x 324 144 361 289 196 1,

ILLUST RAT ION

III. AS TO NATURE AS COMMON OR JOINT Joint Cost Common Costs Differential Cost Outlier

• A data point that falls far away from the other points in the scatter diagram and is not representative of the data
• One cause of outlier is human error or an event which resulted in lower or higher cost as compared to normal operations.
• Outliers are not considered in determining the cost formula. Thus, such costs must be disregarded.
• The cost incurred for the benefit of two or more accounting periods, operations, commodities, or services.
• Subject to allocation.
• Cost of materials, labor, and overhead incurred by two or more products that are simultaneously produced by the firm's manufacturing process.
• Subject to allocation. IV. AS TO THEIR IMPORTANCE IN THE DECISION-MAKING PROCESS Opportunity Cost
• A difference between costs of two alternatives; encompasses both incremental costs (increase) and decremental costs (decrease) between alternatives.
• The benefit is given up when an alternative is preferred over another. It is the benefit foregone by choosing another alternative.

Sunk Cost Out-of-Pocket Cost Shutdown Cost Relevant Cost

• A cost that has already been incurred. It is also referred to as past or committed cost. These costs cannot be changed nor avoided once incurred.
• A future outlay of cash that is associated with a particular decision
• Costs which are to be incurred if a process, department, or division will be closed; always fixed costs
• A future cost that differs between alternatives is relevant costs. To be relevant, the cost should be:
• A future cost that is yet to be incurred
• An incremental cost
• An avoidable cost that can be eliminated by choosing one alternative over another.

Manufacturing Firm Raw Materials Inventory Work In Process Inventory

• Has the most complex type of cost
• Purchases raw materials and processes them into finished goods.
• Controls various cost classification or different type of inventory accounts namely,
  • Raw materials
  • Work-in-process
  • Finished goods
  • Holds items to be used in the production process
  • Recognized upon acquisition.
  • Segregated into two categories (1) direct and (2) indirect materials. RAW MAT ERIALS INVENTORY Beginning Purchases Returns from production Purchase Returns Purchase Discounts Direct Materials Indirect Materials End = (^) =
  • Holds materials used in production and cost to convert those materials or total manufacturing cost. Thus, Total Manufacturing Cost consists of the cost of Direct Materials, Direct Labor, and Factory Overhead.
  • Unfinished products are accounted under this inventory

RAW MAT ERIALS INVENTORY Beginning Purchases Returns from production Purchase Returns Purchase Discounts Direct Materials Indirect Materials End = (^) = PAYROLL Gross Payroll Direct Labor Indirect Labor Selling Expense Administrative Expense = (^) = FACTORY OVERHEAD Indirect Materials Indirect Overhead Other Overhead Costs Returns from Production = (^) = WORK IN PROCESS INVENTORY Beginning Direct Materials Direct Labor Factory Overhead Cost of Goods Manufactured Returns from Production End = (^) = Finished Goods Inventory

• Holds finished products that are ready to be sold WORK IN PROCESS INVENTORY Beginning Direct Materials Direct Labor Factory Overhead Cost of Goods Manufactured Returns from Production End = (^) = FINISHED GOODS INVENTORY Beginning Cost of Goods Manufactured Sales Return Cost of Goods Sold End = (^) =

2 Types of Costing System for assigning Costs to Products/Services

Job Order Costing

Process Costing

Cost Measurement

Job Order Costing

• Used when products differ from one another (heterogenous products), the company produces custom outputs, and the costs associated with these outputs are tracked on the product or customer level
• Used when a company offer a more standardized product (homogenous products) the company produces in batch and the production is continuous

Cost Accumulation System

Cost Accumulation

• Identification and recording of costs; and to keep track of these costs, a source document must be prepared.
• Pertains to the classification of costs. Once the costs are accumulated or recorded, they must be classified and be associated with the units produced.

Types of Costing used to measure Costs associated with Production

Actual Costing

• Costing system that traces cost to a product using the actual costs incurred in the job. This type of system is not commonly used because actual costs are not known until the job is completed.
• The actual cost of direct materials and direct labor can be directly traced to the goods produced, but manufacturing overhead are not incurred uniformly throughout the year, therefore one unit of the product may cost higher than the others.

Normal Costing Cost Assignment Allocation of Factory Overhead Costs Overapplied Overhead

• Timeliness is considered, thus predetermined manufacturing overhead rates are used to estimate manufacturing overhead costs while actual costs of direct materials and direct labor are used - pertains to when costs are already accumulated and measured, they have to be assigned to the goods they are associated with. Underapplied Overhead Estimated Manufacturing Overhead Cost Estimated Total Units in the Allocation Base Predetermined Overhead Rate =
• when actual overhead is greater than applied overhead (debit balance), meaning the allocated overhead was not enough
• if applied overhead is greater than actual overhead (credit balance), which means too much overhead was allocated. The factory overhead account must be zero at the end of the year, therefore the difference is transferred to the cost of goods sold or may be allocated to work in process inventory, finished goods inventory, and cost of goods sold account.